Following the agreement by OPEC and Russia to limit production from late last year, US shaleoil producers have taken advantage of higher prices to re-start production and this has sent prices tumbling back into the low US$50/bbl range for Brent, National Australia Bank analysts note.

While OPEC members decided to continue production cuts for another nine months, much of the upside has already been priced in, the analysts observe, and a fall in oil prices following the decision possibly reflect some disappointment that members failed to come to a last-minute agreement to deepen cuts further.

The analysts suspect major upside for oil prices will remain elusive, envisaging Brent recovering to the mid to high US$50/bbl range by the end of 2017 and to the mid US$60/bbl range by the end of the decade.

Morgan Stanley's strategist has lowered long-term oil price forecasts, amid rising concerns that OPEC may not extend production cuts next year. US shale is also noted to be growing faster than previously thought, while oil demand is slightly weaker. Morgan Stanley forecasts long-term Brent at US$65/bbl versus US$75/bbl previously.

For Australia's oil producers, this suggests to the broker that its number one pick, Woodside Petroleum ((WPL)), can develop Senegal on on current oil prices. Importantly, the broker believes free cash flow is set to increase as production rises over the next few years.

Senegal is a global hot spot for the oil & gas industry, with a number of major operators recently entering the country. In this regard, FAR ((FAR)) is the broker's number one pick in the mid cap segment and the stock is expected to outperform as its development plans become clearer.

While the broker's call for being Overweight on Santos ((STO)) has not worked thus far, the cost reduction thesis is considered to be playing out. The bull/bear spread remains wide, and depend on some of the outcomes around equity raising, gas reservation and GLNG. Morgan Stanley expects sentiment about Santos to improve over time.

LNG

Australian LNG exports continue to ramp up and prices remain low, the NAB analysts observe, averaging $8.36/GJ in the March quarter. As most of the Australian LNG export prices are tied to the price of oil, they do not expect major upside for export prices. Meanwhile, CSG well production is patchy and expensive and Queensland LNG terminals have been buying gas from the domestic market.

Domestic spot prices now exceed export prices because of the shortage of gas and a need to meet export contracts, resulting in a rapid increase in wholesale electricity prices because gas is a primary fuel source for peaking electricity generators. With further delays to both Ichthys and Wheatstone projects, the NAB analysts pull back on expectations for LNG exports for 2017, forecasting around 54.3mt. This rises to 67.4mt in 2018.

Morgan Stanley believes Origin Energy ((ORG)) will re-rate further and show earnings growth as APLNG operations prove up, while energy market margins expand with rising end-user prices and the company de-leverages.

Mineral Sands

Zircon and titanium dioxide feedstocks have now started to climb off very low prices in 2016. Iluka Resources ((ILU)) has announced a US$130/t increase in zircon pricing for the third quarter, and this follows a US $50/t increase on fifth February 15. While price increases are also occurring for rutile, the pace is much slower. Iluka expects first half contracts to lift by 4% but it could be more like 6% because of the strength of prices in China, Credit Suisse asserts.

The broker expects the zircon price to peak 60% above levels of 2016 in the second half of 2018, albeit a subdued outcome versus the period of 2011-12. Producers will probably not want a repeat of that period, which experienced a permanent destruction of demand amid a supply increase.

As global pigment prices lift, the broker expects high-grade feed stocks to follow. Nevertheless, pigments from China have increased penetration of western markets and prices are climbing slowly. This will limit feedstock increases but also allow a higher price to be sustained.

The broker emphasises that mineral sands prices are not counter cyclical, despite increases out of sync with other commodities. Demand factors are the same as other metals and, rather, it is the small market and large inventories which delay a price response to improvement in demand.

Future Metals

After its conference on future metals, Deutsche Bank observes global companies throughout the battery supply chain are making significant investments to expand manufacturing capacity and ASX upstream companies are well-positioned to meet the growing demand. The main drivers for Australia, which has committed to reduce emissions below 2005 levels by at least 26% by 2030, are low-carbon electricity and the electrification of vehicles.

The broker notes the Clean Energy Finance Corp has made significant investments across solar, wind and grid management technologies. Costs for solar and wind have fallen dramatically in recent years and are now viable options although grid stability remains an issue. To date investment has not been made in a major way in terms of electric vehicles, storage or the battery supply chain but Deutsche Bank believes this can change as battery costs fall.

Orocobre ((ORE)) has moved beyond recent pond issues and its Olaroz lithium project is delivering 60% cash margins while rapidly de-gearing. The company has outlined strong demand and believes committing to longer term contracts is attractive when customers offer pricing above spot levels. Deutsche Bank retains a Buy rating on the stock.

Clean TeQ ((CLQ)) has outlined the next prospective catalysts at Syerston nickel-cobalt-scandium which include a bankable feasibility study, completion of offtake by the end of the year and progress to a funding solution. This is one of the largest accumulations of cobalt outside the Democratic Republic of Congo, Deutsche Bank observes.

Meanwhile Global Geoscience ((GSC)) is progressing the sediment-hosted Rhyolite Ridge lithium-boron project and aims to complete additional drilling to delineate resources and complete a pre-feasibility study by later this year.

Other presenters at the conference included Kidman Resources ((KDR)) and Tawanna Resources ((TAW)), both developing lithium projects, which noted options are being assessed and progressed. Kidman intends to complete a feasibility study and maiden reserve by the September quarter and Tawana has flagged first production in the March quarter of 2018.

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